so i've been reading about tax nightmares that DRIP can cause in a taxable account. Do I have to keep careful records? I always thought the brokerage would be able to provide all the necessary information at the time of the sale. In this case is it not worth to enroll in DRIP for taxable account, but rather have the dividend go into a cash account then purchase additional shares of xyz fund to when balancing your portfolio or contribute the dividends towards next years roth contributions?

Starting in 2012, all brokerages are required to track basis and also (when sales happen) report basis to the IRS. For shares acquired before 2012, the brokerage can hopefully provide you with basis information, but this varies from brokerage to brokerage. Having pre-2012 and 2012+ shares in the same account makes things a little more complicated but it's not too bad. In general you'll want to use specific share ID (so you can tell your highest-basis shares), but if you reinvest dividends, you may have a lot of tiny tax lots to deal with. If you have to manually enter your 1099-B, it can be annoying, but hopefully you'll be able to auto-import.

We have 120+ individual lots in a DRIP plan my wife owns (given to her as a UTMA long ago). I strongly suspect we will donate the stock to charity someday and take the deduction. At least this seems like the obvious first choice when we start feeling charitable.

We have switched the dividend payments to cash from reinvesting (so it is no longer technically a DRIP plan), so at least we aren't compounding (hahahah!) the issue.

happymob wrote:We have 120+ individual lots in a DRIP plan my wife owns (given to her as a UTMA long ago). I strongly suspect we will donate the stock to charity someday and take the deduction. At least this seems like the obvious first choice when we start feeling charitable.

We have switched the dividend payments to cash from reinvesting (so it is no longer technically a DRIP plan), so at least we aren't compounding (hahahah!) the issue.

I don't think average basis is that hard. I was in a GE drip. I got statements every year. I owned a calculator. When I sold the whole batch, I added up all my costs. Since the drip only invested quarterly,* I had to add four numbers for each year. Even though I was in it for 20 years, I knew how to add 80 numbers (slowly, and repeat several times to double and triple check). 120 lots is only 50% harder (well maybe adding 120 numbers is more that 50% more difficult than adding 80, but it shouldn't be twice as hard).

* I can't recall for sure, but you may have been able to make additional purchases on a monthly basis. I sometimes did make additional purchases, but they always coincided with the quarterly dividends to keep my share of the brokerage costs low.

genjix wrote:Hi,
so i've been reading about tax nightmares that DRIP can cause in a taxable account. Do I have to keep careful records? I always thought the brokerage would be able to provide all the necessary information at the time of the sale. In this case is it not worth to enroll in DRIP for taxable account, but rather have the dividend go into a cash account then purchase additional shares of xyz fund to when balancing your portfolio or contribute the dividends towards next years roth contributions?

I did some DRIPS in a number of stocks over a long period until about 15 years ago, and thankfully kept my own records. I certainly would continue to keep records even with the new rule. Sure, starting this year the brokerage has to report the basis to IRS when you sell, so they obviously will need to know it. They always could tell you the basis if you stayed with the one broker. Trouble is DRIPS often go on for a long time and each company used a different broker or did it in house. Then stuff happens. The DRIP stock company gets broken up, merged, or changes brokers, or they bring DRIP management in house or go out of house, the broker goes out of business, or something. Don't know exactly how it happened in each case..... all I can say is in every case my cost basis got lost in the shuffle.

happymob wrote:
We have switched the dividend payments to cash from reinvesting (so it is no longer technically a DRIP plan), so at least we aren't compounding (hahahah!) the issue.

I don't think average basis is that hard. I was in a GE drip. I got statements every year. I owned a calculator. When I sold the whole batch, I added up all my costs. Since the drip only invested quarterly,* I had to add four numbers for each year. Even though I was in it for 20 years, I knew how to add 80 numbers (slowly, and repeat several times to double and triple check). .

would it work the same way with ETFs and Mutual funds as it does with individual stocks?

happymob wrote:We have 120+ individual lots in a DRIP plan my wife owns (given to her as a UTMA long ago). I strongly suspect we will donate the stock to charity someday and take the deduction. At least this seems like the obvious first choice when we start feeling charitable.

We have switched the dividend payments to cash from reinvesting (so it is no longer technically a DRIP plan), so at least we aren't compounding (hahahah!) the issue.

I don't think average basis is that hard. I was in a GE drip. I got statements every year. I owned a calculator. When I sold the whole batch, I added up all my costs. Since the drip only invested quarterly,* I had to add four numbers for each year. Even though I was in it for 20 years, I knew how to add 80 numbers (slowly, and repeat several times to double and triple check). 120 lots is only 50% harder (well maybe adding 120 numbers is more that 50% more difficult than adding 80, but it shouldn't be twice as hard).

* I can't recall for sure, but you may have been able to make additional purchases on a monthly basis. I sometimes did make additional purchases, but they always coincided with the quarterly dividends to keep my share of the brokerage costs low.

Bad record keeping on our part plus the company has changed names twice (via mergers), so while I know it's not an insurmountable problem, these shares are still likely to get donated (or inherited).